Beware 'Credit Supernova' Looming Ahead : Gross

Pimco's Bill Gross identifies the general areas of stocks and bonds that he thinks offer the best opportunities right now.

Pimco's Bill Gross looks at the investing universe and sees a dangerous supernova - a looming explosion that could see investors lost in space.

The head of the Pacific Investment Management bond giant has issued an ominous forecast in which he worries that the global central bank-induced credit bubble "is running out of energy and time." (Read More: Federal Reserve Should Do Less, Not More: Morici)

As a result, investors will have to get used to an atmosphere of diminishing returns and portfolios that will hold more hard assets like commodities and fewer less-tangible financial assets like stocks.

"Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic," Gross said in his February newsletter.

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"When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets," he added.

Gross advocates investors turn to gold and other commodities for inflation protection and currencies and assets in other countries that don't have such active central banks and huge debt loads. He favors Australia, Brazil, Canada and Mexico. (Read More: Money Pouring Into Stocks 'Is Usually a Negative Sign')

In the U.S. alone, the Federal Reserve has created a shade under $3 trillion in new money to buy more than $1.7 trillion in Treasurys and $968 billion in mortgage-backed securities, according to the most recent Fed balance sheet. The Fed will be buying $85 billion a month of the two debt instruments as it seeks to continue stimulating the slow-growth economy, which actually contracted 0.1 percent in the fourth quarter.

The inability of central banks to generate robust growth despite all the money-printing has stoked concern about future returns by Gross and Pimco, which manages $1.92 trillion for clients.

"Unless central banks and credit extending private banks can generate real or at second best, nominal growth with their trillions of dollars, euros, and yen, then the risk of credit market entropy will increase," Gross said.

His "credit supernova" metaphor describes a condition in which "our current monetary system seems to require perpetual expansion to maintain its existence" similar to the physical universe.

That expansion to $56 trillion, though, has generated consistently lower results, he said. Consequently, the investor base needed for the expansion to continue may not last.

"The end of the global monetary system is not nigh. But the entropic characterization is most illustrative," Gross said. "Appreciate the supernova characterization of our current credit system. At some point it will transition to something else."